McEwen Mining Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. McEwen operates the El Gallo 1 mine in Mexico and holds a 49% interest in the San José mine in Argentina through Minera Santa Cruz S.A. (MSC), which is accounted for using the equity method. Amounts below are U.S. dollars.
Financial and operating performance
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Gold and silver sales (El Gallo 1) | $21.2 million | $22.9 million |
| Income from MSC investment, net of amortization | $5.0 million | $0.3 million |
| Net income | $13.0 million; $0.04 per share | $6.0 million; $0.02 per share |
| Operating income | $10.4 million | $5.2 million |
| Operating cash flow | $14.7 million | $5.6 million |
| Cash and cash equivalents at period end | $34.6 million | $25.9 million at Dec. 31, 2015 |
| Working capital | $39.7 million | $32.4 million at Dec. 31, 2015 |
| Total assets / total liabilities | $480.0 million / $50.3 million | $475.1 million / $56.8 million at Dec. 31, 2015 |
McEwen reported 40,578 attributable gold-equivalent ounces sold, up from 37,681, and 37,958 ounces produced, up 14% year over year. Consolidated non-GAAP costs per gold-equivalent ounce sold were $615 cash costs, $814 all-in sustaining costs and $903 all-in costs, compared with $674, $948 and $1,044, respectively. These measures are not standardized GAAP metrics.
Cash increased by $8.7 million during the quarter. Operating cash flow benefited from $6.8 million of Mexican VAT collections and $2.6 million in MSC dividends, as well as lower supplier and employee payments. Investing activities used $0.6 million; financing activities used $5.5 million, including repayment of the Mexican subsidiary’s $3.4 million bank borrowing, a $1.5 million return-of-capital payment and $0.6 million of share repurchases. The bank facility was fully repaid and closed; the company reported no debt at quarter end. Cash, investments and precious metals—a company-defined non-GAAP liquidity measure—totaled $43.5 million.
Changes versus the prior year
- Net income more than doubled, while direct gold and silver sales declined 7%. The earnings increase primarily reflected stronger MSC investment income, lower production costs, and reduced exploration, property holding and general and administrative expenses.
- MSC’s reported net sales rose to $52.1 million from $45.9 million, and its net income was $8.2 million versus $1.2 million. McEwen’s 49% attributable share of MSC net income was $4.0 million before purchase-accounting amortization and tax effects.
- Production-cost expense declined 13% to $9.1 million. The company attributed lower per-ounce costs to higher grades, improved efficiencies, currency devaluation and, at MSC, lower export duties and the absence of the prior-year labor stoppage.
- Average realized gold and silver prices were $1,205 and $15.28 per ounce, versus $1,213 and $17.02. El Gallo 1 sold fewer gold-equivalent ounces; MSC sales benefited from higher shipment volumes, including shipments delayed at year-end 2015.
Outlook, risks and unusual items
- Management raised 2016 gold production guidance from 96,500 to 99,500 ounces, maintained silver guidance at 3.3 million ounces, and estimated consolidated production of 140,000–150,000 gold-equivalent ounces. El Gallo 1 gold guidance increased to 55,000 ounces; San José guidance remained 45,000 gold ounces and 3.3 million silver ounces.
- Management said existing working capital should fund operations, development and corporate activities for the next 12 months. A positive production decision would require additional funding estimated at approximately $60 million for Gold Bar or $150 million for El Gallo 2. Gold Bar construction was targeted to begin in 2017 and production in 2018, dependent on permitting; the filing does not assure these milestones.
- Q1 net income included a $1.9 million income-tax recovery associated with Argentine-peso devaluation. The filing also describes currency-related tax effects within MSC investment income; these effects make reported earnings sensitive to exchange rates.
- On April 19, 2016, after quarter end, McEwen bought out the El Gallo 1 royalty, which had been 3.5% of gross revenue less allowable deductions. It paid $5.25 million at closing and may owe a conditional $1.0 million on June 30, 2018 if the mine is operating then. The royalty ceased accruing at the end of March.
- Key risks include commodity and foreign-exchange volatility, permitting and financing requirements, uncertain VAT refund timing (Mexican VAT receivable was $4.1 million), reliance on MSC information and decisions, and exploration, development and operational risks. The filing reports $4.8 million of U.S. reclamation surety bonds; the MD&A cites $4.9 million, so the stated amount is inconsistent. No material risk-factor changes or material off-balance-sheet arrangements were reported. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether 2016 production guidance is achieved, particularly as management expected El Gallo 1 grades to decline after processing higher-grade year-end stockpiles.
- The quality and sustainability of earnings: assess the Argentine-peso-related tax recovery and MSC equity-method income separately from mine-level results.
- MSC operating and financial results, dividend capacity and any funding or ownership implications; McEwen does not control MSC’s day-to-day operations and says MSC supplied most San José data.
- Permitting, cost estimates and financing plans for Gold Bar and El Gallo 2, including the substantial capital needed beyond available working capital.
- Collection timing for the $4.1 million VAT receivable and the status and terms of reclamation bonding and obligations.